Legal Definitions - marshaling doctrine

The marshaling doctrine is a legal principle designed to promote fairness when multiple creditors are seeking to collect debts from a single debtor who has limited assets. It comes into play when a primary (senior) creditor has the right to claim payment from two or more different assets, while a secondary (junior) creditor can only claim payment from one of those same assets. Under this doctrine, the senior creditor is required to satisfy their debt first from the assets that the junior creditor *cannot* access. This leaves the shared asset available for the junior creditor to claim, preventing the senior creditor from depleting the only asset available to the junior creditor and thereby protecting the junior creditor's ability to recover their debt.

Here are some examples to illustrate how the marshaling doctrine works:

• Real Estate Mortgages: Imagine a homeowner, Mr. Henderson, who owns two properties: his primary residence and a rental property. He has a large mortgage with Bank A that is secured by (meaning, backed by) *both* his primary residence and his rental property. Separately, he took out a smaller second mortgage with Bank B, but this loan is secured *only* by his primary residence. If Mr. Henderson defaults on his loans and both banks try to foreclose, the marshaling doctrine would require Bank A (the senior creditor with access to both properties) to first seek payment from the rental property (the asset Bank B has no claim on). Only if the rental property doesn't fully cover Bank A's debt can Bank A then claim the remaining balance from the primary residence. This ensures that Bank B (the junior creditor, whose only recourse is the primary residence) has the best possible chance to recover its debt from the primary residence.

• Business Assets: Consider "Innovate Tech," a small company that has borrowed money from two different lenders. Big Lender Inc. provided a substantial loan, secured by *all* of Innovate Tech's assets, including its valuable manufacturing equipment and its inventory of finished products. A smaller loan was taken from Supplier Finance Co., which is secured *only* by Innovate Tech's inventory. If Innovate Tech faces financial difficulties and defaults, the marshaling doctrine would require Big Lender Inc. (the senior creditor) to first recover its debt by selling the manufacturing equipment (the asset Supplier Finance Co. has no claim on). This action preserves the inventory, allowing Supplier Finance Co. (the junior creditor) to potentially recover its loan from the sale of the inventory, rather than having Big Lender Inc. take all the inventory first and leave nothing for Supplier Finance Co.

• Personal Investments: Sarah has a diversified investment portfolio and a collection of rare coins. She took out a personal loan from Wealth Management Group, which secured its loan with *both* her investment portfolio and her coin collection. Later, she took out another, smaller loan from Quick Cash Lenders, which secured its loan *only* with her investment portfolio. If Sarah defaults on both loans, the marshaling doctrine would direct Wealth Management Group (the senior creditor) to first seek repayment from the sale of the coin collection (the asset Quick Cash Lenders has no claim on). By doing so, the investment portfolio is protected as much as possible, giving Quick Cash Lenders (the junior creditor, whose only security is the investment portfolio) a better opportunity to recover its loan from the remaining value of the portfolio.